BEYOND MICROCREDIT: THE ROLE OF SAVINGS BANKS IN MICROFINANCE potx

This issue of Perspectives examines the role of WSBI members inimproving access to finance and enhancing microfinance activities in theAsia/Pacific, African, and Latin American regions..

TABLE OF CONTENTS

Section 1.: Microfinance: Description and recommendations

1.4.2 Microfinance – An institutional commitment and

1.5 Summary of the WSBI members’ microfinance approach

2.6 Allowing for increased deposit-taking activities 302.7 Allowing the recycling of deposits into lending 31

2.9 Encouraging linkages between banks, microfinance

2.10 Implementing business rules to ensure

Section 2.: WSBI members’ experiences: A presentation

Report 1 Microfinance in Latin America – The leadership of

1.2 Microfinance as carried out by WSBI Latin American

1.5.1 Peru - Federación Peruana de Cajas Municipales

1.5.3 Colombia – Banco Caja Social Colmena– BCSC 58

Report 2 Microfinance Services by Savings Banks in Africa –

The Sleeping Giants have started moving, but where are they going? 61

2.7 Diversifying into insurance and payment services 81

Report 3 Microfinance in Asia/Pacific – Experiences of WSBI members

3.2 WSBI members’ intervention in microfinance in Asia/Pacific 94

3.2.2 Main characteristics of WSBI Asian members’

3.3.1 Hatton National Bank (HNB), Sri Lanka –

Rural savings mobilisation and social development

3.3.2 Vietnam Bank for Agriculture and Rural

Development (VBARD) – Services to rural market 1003.3.3 National Bank for Agriculture and Rural

Development (NABARD), India – Self-Help Groupmodel to contribute to poverty alleviation in

3.3.4 China Postal Savings Bank (CPSB) –

3.3.5 National Savings Institute (NSI), India –

Promotion and facilitation of small-scale savings 1063.3.6 Government Savings Bank of Thailand (GSB) –People Bank’s programme with a specific focus

3.3.7 Bank Simpanan Nasional (BSN), Malaysia –

Microfinance to finance micro and small enterprises 110

I am delighted to present to you a new issue of Perspectives whichfocuses on microfinance and the role of WSBI members Access tofinancial services at the microlevel has been shown to be critical fordeveloping economies and individual capacities – especially among poorerpopulations Savings and socially committed retail banks have long workedtowards financial inclusion and the betterment of their communities

This issue of Perspectives examines the role of WSBI members inimproving access to finance and enhancing microfinance activities in theAsia/Pacific, African, and Latin American regions The document alsoexamines what must be done to enhance microfinance activitiesthroughout the world – turning a focus on microcredit into a focus ongeneral financial inclusion

The world-wide movement towards financial inclusion is critical foreconomic development in all geographic areas This publication confirmsthat savings banks and socially responsible retail banks play a leading role

in this effort and offer innovative and important products to serve middleand lower income clients

WSBI aims to continue to work with its members and internationalorganisations to capitalise on the progress being made amongst ourmembers throughout the world I hope that this publication provides thereader with a good overview of some of the important issues related tomicrofinance

Chris De Noose

Managing Director, WSBI

FOREWORD

SECTION 1.

MICROFINANCE: DESCRIPTION AND RECOMMENDATIONS FOR ENABLING BETTER DEVELOPMENT

This edition of Perspectives analyses the role of savings banks and WSBImembers in microfinance.1 The first section discusses microfinance ingeneral The second section presents WSBI’s recommendations for anenabling regulatory framework for microfinance Subsequently, thispublication provides more in depth and detailed analysis of the situations

in Latin America, Africa, and Asia – using examples from the experience

of WSBI members These three analyses are independent reports whichcan be read separately of one another With this analysis, this edition ofPerspectives aims to contribute to the knowledge base regardingfinancial inclusion and economic development and stimulate furtherprogress in this important area

Two events have marked the recognition of microcredit as a core tool

to drive sustainable development: the United Nations 2005 Year ofMicrocredit and the award of the Nobel Peace Price 2006 to themicrocredit “icon”, Professor Mohammad Yunus

This momentum has been very helpful in bringing microfinance into thespotlight not only in developing countries but also in the developedworld The awareness by policy makers about the role of microfinance as

a major tool for empowering vulnerable people, addressing social andeconomic exclusion, and alleviating poverty has grown significantly overrecent years Consequently, the scope of this challenge has beenbroadened to encompass the entire issue of financial inclusion, whichentails access to a full spectrum of financial services

1 INTRODUCTION:

CHARACTERISTICS

OF MICROFINANCE

1 This publication covers microfinance offered by socially committed retail/savings banks

in Latin America, Africa and Asia/Pacific For activities in Europe, see ESBG (2006) and

The consensus by all stakeholders has been to incorporate the principle

of “Building of Inclusive Financial Sectors” into various aspects ofeconomic and business development.2 The role of regulation andsupervision is crucial in this perspective A regulatory environment that isconducive to financial inclusion is important for government policy andcritical to widening access to financial services

1.1 What is microfinance?

Microfinance is the provision of small-scale financial services to the poor orthe poorest among the poor It is unique among economic developmentinitiatives because it has the ability to contribute directly to people’seconomic and social progress by allowing them to invest and multiplytheir scarce assets Although there is no standardized number to definedifferent “micro” products in quantification, it should be understood inits broadest sense, covering a whole range of low value financial products

One of the main reasons why conventional banking institutions haveconcentrated their efforts on serving higher income segments of thepopulation is the operational and administrative costs linked to serving

“small” clients Additionally, there is a higher risk (at least perceived)associated with these services in dealing with lower income segments ofthe population However, there is also a demand for financial servicesamong underprivileged, low income people This market gap has resulted

in a great significance being put on microfinance practices worldwide.Successful microfinance institutions (MFIs) have developed effective ways

to empower vulnerable women and men, address social and economicexclusion, and alleviate poverty by providing individuals the opportunity

to build assets as collateral and to improve their quality of life Throughmicrofinance initiatives, previously unserved populations have proven to

be reliable clients

The clients of microfinance institutions are typically low-incomeindividuals, who are self-employed or salaried In rural areas, they maygenerate income from farming, food processing or trading at the localmarkets, whereas in urban areas they tend to be shop keepers, streetvendors, entrepreneurs, service providers, craftsmen, factory workers, etc

2 With reference to the title of the Blue Book developed under the aegis of the United Nations in the context of the Year of Microcredit See UNCDF (2006).

They generally have income generating activities that are somewhatunpredictable and may be seasonal but are more or less stable.Nevertheless, these people often lack collateral, and in some cases theyhave low levels of reading and writing skills By serving this segment ofthe population in developing and emerging economies the microfinanceindustry has experienced significant growth in the past decade.3 It hasincreasingly been recognized that while not all people are eligible formicrocredit or would benefit from it,4 all are deposit worthy, need tomake payments, and can benefit from insurance.

Thus, the importance of the microfinance movement today is the result

of an enlarged vision of banking – where financial inclusiveness plays animportant role in social and economic development, and where access tofinance for the poor represents an extension of the current offer of services

1.2 Microfinance – broader than microcredit

In the eyes of the general public, microfinance tends to be limited

to microcredit The United Nations naming 2005 Year of Microcreditand the award of the Nobel Peace Price 2006 to the microcredit “icon”,Professor Mohammad Yunus contributed to this recognition of microcredit

in particular as a core tool to drive sustainable development

However, the scope of microfinance is broader This includes providing anadapted and diverse range of financial products and services to unservedpopulations around the world The term “microfinance” covers a wholerange of small amount financial products, including savings accounts,insurance, national/international monetary transfer services, andpayments services (especially through non-cash transactions such as withplastic cards, mobile phones, and other electronic devices)

3 The Microcredit Summit Campaign (2009) reported 2,931 MFIs reaching 80,868,343 clients

in 2003 54,785,433 were among the poorest when they took their first loan In 2006 they reported 3,316 institutions reaching 133,030,913 clients 92,922,574 were among the poorest when they took their first loan Taking into account recent figures the same organization confirms that, having double-checked 80% of the figures totaling 3,552 microfinance organizations in 2007, the 100-million-poor mark was reached by the end of

2007 It is estimated that these organizations reached more than 150 million clients, of which more 106 million were "poor", in Microcredit Summit Campaign (2009)

There is a need for policy-makers and regulators, at national, regional andinternational level, to embrace this wider perspective and include allactors involved in offering these types of services – not only microcreditproviders, into the scope of their microfinance-related initiatives.

Practitioners, academics and professionals “have long outgrown theword microcredit Today, the word microfinance doesn't even capture the

scope and scale of what is happening in the world of finance for thepoor What was once a neat and tidy, well-delineated little sub-culture,now encompasses a dizzying range of delivery organizations and services,all increasingly interwoven with the rest of the financial sector All aroundthe world, people are witnessing experimentation, and a surge of newentrants to the microfinance field The result is an explosion of diversity:diversity of delivery channels, of services, of funding sources for MFI and,

of course, a variety of clients.”5

1.3 Diversity of players

Many institutions have begun to provide microfinance services, eitherbecause of concern for development or because of the businessopportunity presented or a combination of the two Though it is difficult

to classify microfinance providers, it is still important to identify the variousmodels and understand the existing distinct approaches to microfinance

There is significant diversity among the type of players in themicrofinance industry This includes Self-Help Groups, Banking, Creditand Savings Cooperatives, NGOs, as well as specifically regulated institutionsproviding microfinance services like Postal Banks, Commercial andSavings Banks These actors do not necessarily offer the same kinds ofservices Most of these organisations provide microcredit Others collectsavings Authorized institutions do both Still others act as “apexinstitutions” which channel funding (grants, loans, guarantees, etc.) tomultiple MFIs in single country or region This can sometimes includesupporting technical service This is similar to the role sometimes played

by national development banks.6

5 Littlefield 2005.

6 Levy 2009.

The reality today is that the growth of the microfinance industry hasinspired partnerships and knowledge transfer between organizations.Microfinance providers are learning from each other and different modelsare emerging at different levels in order to respond to different clients indifferent contexts

The first identifiable model among leading microfinance institutions isthat of NGOs with a social development background – some of whichhave transformed and scaled up to become banks or regulated institutions,supervised by the national authorities in their countries and responding

to the specificities of their markets NGOs which have not become bankscan not be categorized as formal financial institutions Therefore they arenot allowed to provide all manner of services – especially savings services

or products

Semi-formal institutions like some NGOs, credit unions and cooperatives areformal, registered entities subject to all relevant general laws – includingcommercial laws – but informal as they are, with few exceptions,not subject to banking regulation and supervision.7 Having developed

a particular relationship with previously “unbanked” individuals, theseembedded microfinance institutions have succeeded in providingfinancial services to poor and un-served populations

Because of a lack of regulation for monitoring and supervising financialNGO activities, these organisations are not usually allowed to collect savings,but they are allowed to disburse microcredits In fact, some successfulNGOs have proven able to achieve self sustainability “Loan officers” andtheir clients have been able to guarantee good loan repayment rates andsome NGOs have generated high quality portfolios

Another model is represented by banks and other commercially orientedinstitutions which use their branch infrastructure to reach out and servelow income customers Included among these institutions are the savingsand retail banks that are affiliated with the World Savings Banks Institute.Savings banks’ primary concern is to mobilize financial resources andinvest these resources in the local economy

They are considered socially committed for profit institutions and theydiffer from microfinance initiatives that were created with a specific andexclusive focus on credit In most countries they have build up a reputation

as solid institutions that have proven effective in times of crisis and aretrusted by savers Savings banks generally provide a sense of security forlow income clients thanks to their formal character and explicit (orimplicit) guarantee of deposits

Commercial banks and socially committed retail/savings banks are formalfinancial institutions They are subject both to laws and regulationswhich govern companies and to banking regulation and supervision.Their importance in the microfinance field is based upon theirinfrastructure and expertise in disbursing credits and securely collectingand managing deposits A number of them have efficient managementinformation’s systems and some are already involved in payments andinternational remittances services, as well as insurance

Some banks are active as guarantors for securitizing microfinanceportfolios However, what distinguishes many WSBI members from purelycommercial banks is their social commitment, which is why theirmicrofinance activities are at the core of their retail business They areheavily involved in the mobilization of savings and their clients aretypically households, microenterprises and SMEs, essential actors tofoster development Moreover, although the ownership structures ofWSBI members vary, they are all formal financial institutions strictlyregulated and supervised in order to protect clients and the marketswhere they operate

Another model results from a combination of the previous two – wherepartnerships between socially-oriented microfinance institutions and banksare being forged to take advantage of each other's comparative advantages.There are some very sophisticated partnerships between importantNGOs, commercial banks, and investment funds These organisationshave set up portfolio securitization schemes as alternative fundingstrategies for NGOs forbidden to collect savings Nevertheless, this type

of activity is not commonly undertaken by semi-formal NGOs It is usuallylimited to the bigger and most efficient ones

Thus, different providers of microfinance services may have differentcharacteristics according to business orientation, target group, legalstatus, ownership structure, capacity to mobilize savings, methodologyand regulation which affects them However, all of them, whether theyare banks, non banks or other type of institutions, share the commoncharacteristic of providing financial services to an otherwise “unbanked”population For this reason, there is no need to favour only one model.There is room for various approaches to microfinance and complementarywork and strategies are needed in order to build inclusive and responsiblefinancial systems, capable of serving a large range of clients and stakeholderswith different expectations and needs

Thus, as microfinance grows, its development necessitates two necessaryavenues of action First, business models must be adapted to differentcontexts and different clients with different levels of income andproductivity Second, appropriate regulation schemes, where necessary,must be put into place that are proportionate to the expected benefits ofmicrofinance programmes and strike the right balance between themitigation of risk and the costs of implementation and compliance withsupervision and regulatory requirements

Frameworks to organize microfinance activities should take into accountdifferent levels of formality, sophistication, and activities and adapt tonational and regional circumstances with the objective to reach institutionalsustainability for the benefit of clients, create aggregated value and providequality financial services for a large amount of un-served populations

1.4 Microfinance and socially committed retail/savings banks

1.4.1 WSBI members: managing the double bottom-line forconsumer benefit

Savings banks are the largest element of institutions which target a

“double bottom-line” – both financial profit and servicing the interests ofthe communities where they operate These institutions explicitly targetcustomers not normally well served by purely shareholder-driven,commercial banks

WSBI members are large stakeholders in the microfinance market They areideally equipped to be the leading providers of microfinance services intheir home countries:

n They are accessible WSBI members are geographically close to peopledue to their widespread branch networks and nationwide coverage

In many countries, savings and postal savings banks are the onlyfinancial institutions that reach extensively remote areas

n They have significant outreach among the poorest households

in their countries For example, one of WSBI members in India, theNational Savings Institute, reaches 6 million of the poorest householdsand the WSBI member in Thailand, the Government Savings Bank,reaches 4.5 million.8

n They have relatively low requirements for accessing their services.

WSBI members have a wealth of assets in terms of branch infrastructureand institutional knowledge, which allows them to achieve economies

of scale and thus be able to offer affordable financial products

n They provide a whole range of financial services in a sustainablemanner WSBI members are the biggest providers of savings accounts

(1.1 billion)9and significant providers of loan accounts (30+ million).10

Some WSBI members are also active in offering remittance productsand many of them have specialized microinsurance products

Savings banks have a clear dual mandate They work on promotingaccess to financial services for all un-banked communities and individuals

in the various territories where they operate At the same time, they areimpelled to make reasonable profits so that the outreach achieved can besustained without constant recourse to public or charitable subsidies.Hence, recognizing the importance of their stability as engines for socialand economical development, savings banks have the mission to growwith the communities they serve For this reason, the decision to provideaffordable financial services for un-served customers and to maintain abroad retail distribution network distinguishes saving banks from purelyprofit maximizing financial institutions

8 WSBI 2008.

9 Peachey 2006b.

10 Peachey 2006a.

With 23 members from 16 countries in Asia and the Pacific, 34 membersfrom 31 countries in Africa and 15 members from 13 countries in LatinAmerica,11WSBI member banks share a business model based on a closerelationship with the retail customer and a sound knowledge of thecustomer’s needs and capacities Members act directly to facilitate access

to financial services and generate social inclusion in their respectivecountries At the same time, they act indirectly to finance social programsfrom their profits made from a diversified financial pool of activitieswithin the region where they operate

Savings banks are very large providers of financial services in all socio-economicsegments They have both a strong breath of outreach – serving a largepercentage of the population – and significant depth of outreach as well –reaching a large number of the poorest households This is especially thecase in rural areas, but also in urban settings This means that savings bankshold great potential for delivering accessible financial services for all.12

1.4.2 Microfinance – An institutional commitment and a responsiblebusiness approach

Institutional commitment is a prerequisite for providing low-income peoplewith financial services The commitment of savings and socially committedretail banks to providing financial services to underserved marketsdistinguishes them from most other formal financial institutions In addition

to the distribution of part of their profits for increasing social and financialinclusion, WSBI member banks generally go further than other financialinstitutions in their educational role to stimulate the mobilization of savings.They set up campaigns that are innovative and add value to the bank inaddition to the marketing aspect This pedagogical engagement and support

to initiatives aimed at achieving social and financial inclusion are otherexpressions of the traditional social responsibility of WSBI member banks

Savings banks and socially committed retail banks provide a wide range

of financial services in a sustainable manner In this aspect they differ fromseveral microfinance institutions that depend on donor funding and offerlimited credit services In most cases, savings banks and socially committedretail banks have a diversified retail banking portfolio of services offered.Therefore, they are able to raise income in different areas of the bankingbusiness.13

11 For a list of members, go to http://www.wsbi.org/template/content.aspx?id=320

12 Peachey 2008.

Furthermore, as proximity banks, savings and socially committed retailbanks have essential assets that make them ideally equipped to providemicrofinance services They are accessible because of their geographicproximity given their wide spread branch networks and national andregional wide coverage Compared to other formal financial institutionsthey also tend to have relatively low requirements for accessing theirservices, especially low minimum balances for savings accounts.14

A responsible approach to business is at the core of the WSBI members’banking activities For this reason, microfinance practices have beentraditionally important for members active in developing and emergingeconomies

1.5 Summary of the WSBI members’ microfinance

approach by region

Though the region-specific reports which are included in this “Perspectives”will delve more deeply into the specific characteristics of microfinanceactivities in various regions, it is worth briefly examining the basiccharacteristics of WSBI member involvement in microfinance in LatinAmerica, Africa, and Asia/the Pacific

1.5.1 Latin America

In Latin America, microfinance has experienced an enormous success with avibrant sector of sophisticated and commercially oriented microfinanceproviders Indeed, most microfinance institutions in Latin America seek tobecome commercial players in the financial sector, achieving impressiverecords of financial and operational performance Many of them areintegrated into the formal financial system, being banks or microfinancespecialized institutions, regulated by the financial authorities in theircountries

14 WSBI 2004.

A recent regional survey showed that in 2005, around 6 million peoplereceived microcredits in Latin America and most of those credits (81%)came from regulated institutions The overall portfolio stood at aroundUSD 5.4 billion for the same year In terms of growth, the survey revealedannual growth rates of 35% in terms of the number of clients and 46%

in terms of the size of the portfolio This confirms that the Latin Americanmicrofinance industry is experiencing rapid expansion

While microfinance in Asia and Africa has a stronger social focus on thepoor, microfinance in Latin America is mostly understood as a financialsolution for microentrepreneurs and their families Thus, loan averagevalues are higher than those found in the other regions (USD 783 in LatinAmerica versus USD 121 for Asia and USD 187 for Africa).16 It is alsomainly an urban activity, where individual credit methodologiespredominate over group lending This differs from the large rural schemesexisting in Asia

Microfinance providers in Latin America can be broadly characterized inthree categories They are;

1 NGOs that have transformed into regulated institutions (upscaling)

2 banks that have entered into the microfinance market (downscaling),

or

3 traditional proximity financial institutions created to serve the micro entrepreneur market

-WSBI members which act as microfinance providers in the region belong

to the latter two categories They are either banks with specialmicrofinance programs or proximity financial institutions dedicated tomicroentrepreneurs

15 Navajas and Tejerina 2006.

16 Data from MIX (2007a) – looking at median values of “Average Loan Balance per

WSBI Latin American members:

n Are large and long-established providers of microfinance services

As proximity financial institutions with large networks and with astrong social commitment, they are leaders in the Latin Americanmicrofinance industry A rough estimate indicates that they providedmicrocredits to more than 1.45 million clients in 2006 They alsomobilized at least USD 779 million deposits from their microfinanceclients in that same year

n Provide a full range of microfinance products All of them mobilizesavings, which is one of their major advantages compared to othermicrofinance providers focusing exclusively on credit They alsoprovide remittance services and some of them are leaders in thedistribution of accessible insurance products

n Are experiencing impressive growth both in terms of clients, portfolioand savings collection On average they have experienced 40%portfolio growth rate and 30% client growth rate for each of the past

3 years (2004-2006)

1.5.2 Africa

Broadly speaking, African savings banks are providers of microfinanceservices However, they have historically not been classified amongmicrofinance institutions The main reason is because the dominantparadigm in microfinance until now merely recognises microcreditinstitutions, which savings banks could not be (and still are not in manycases) in Africa because of their institutional set-ups that commonlyprohibited any form of lending

However, the definition of microfinance has evolved over recent yearsfrom its narrow perspective The scope of microfinance services nowlargely take into consideration basic financial services that are needed byvulnerable people Recent research in the field of “Access to Finance” hassubstantially contributed to changing how experts define microfinance.There is a greater awareness that poor people even desire more safe andaffordable deposit services to protect their small savings Their demand isalso very high for payment services (including money transfer services)and insurance services

This larger perspective of microfinance brings African savings banks in thepicture However, their contribution to microfinance is still very oftenoverlooked by experts and policy makers The purpose of this study is

to survey and give visibility to the activities of savings banks in this field

It complements the summary report on Microfinance in Africa17 withhard evidence supported by data on these activities The main findings ofthis report are as follows:

n Savings banks in Africa have managed to provide convenient basicfinancial services by combining accessibility (secure and affordablefinancial services) and proximity (extensive retail distribution networks)

to their clients Their potential comparative advantage in deposit-takingservices and money transfer services (including remittances) could befurther enhanced through payment facilities

n Institutional set-ups are changing favourably, but the general trend forsavings banks is to reposition towards low-risk retail banking activitiesand not to become pure microfinance institutions or microfinance banks

n There are diverse business models to respond to the pressing marketdemand for microcredit services Some savings banks have introduced

a microcredit scheme in their product line (Tanzania, Zambia) oropened a specialised window (Egypt) for direct participation whileother have opted for an indirect participation through linkages(Uganda, Zimbabwe) with sustainable and promising microfinanceinstitutions (e.g., refinancing of wholesale loans for on-lending toretail microfinance clients

n Where savings banks are direct microcredit providers the individuallending methodology has generated better results Loan sizes varyacross countries from USD 50 to USD 2,000 (often group loans) butare in line with the industry average while microloan portfolios rangebetween USD 100,000 and USD 8 million (at the National Bank forDevelopment in Egypt)

n Regulation is an issue for savings banks involved in microfinancebecause they are subject to stringent banking regulations Microcredit is

in principle uncollateralized lending and as such it is more demandingfor complying with prudential requirements In general, regulation is alimit to the expansion of microcredit programmes run by savings banks

Though microfinance activities in Asia are receiving more recognition,many potential clients continue to lack access to basic financial services.According to a report by the International Finance Corporation (IFC)19thedemand for financial services among poor people is extensive in Asia andthe supply of microfinance is also quite large For example, the field ofmicrocredit is estimated at USD 4 billion, serving 22 million borrowers, with

an overall market penetration rate of only 6% This market is, however, limitedand concentrated in just a few countries such as in India and Bangladesh,where the largest MFIs20in Asia in terms of borrowers can be found Asian microfinance has long focused on serving women: 98% of borrowerswere women in Asia in 2006, as compared to 66% in Africa and 61.8%

in Latin America Microfinance in Asia is also associated with some of thelowest average loan balance worldwide, with a stronger social focus onthe poor, presenting lower loan average values than in other regions(USD 151 in Asia in 2006 versus USD 183 in Africa and USD 671 inLatin America) and lower savings account balances than in Latin America(USD 165 versus USD 732).21

18 MIX 2006 MIX is short for Microfinance Information Exchange The MIX Market provides information on over 800 individual microfinance institutions worldwide It presents the most comprehensive data source for the microfinance industry

19 IFC 2007.

20 MIX 2008a.

21 Data from MIX (2008a) looking at median values of “Average Loan Balance per Borrower” and “Average Savings Account Balance” for Asia, Africa and Latin America for the year 2006

2 TOWARDS AN ENABLING REGULATORY AND

SUPERVISORY FRAMEWORK

Microfinance is one of many tools for expanding access to financial services.Therefore, any policy, legislative or regulatory initiative on microfinanceshould be assessed primarily with regards to the overall objective ofincreasing the level of access to financial services This section ofthe document lays out what is necessary for an enabling regulatory andsupervisory framework to facilitate expansion of access to financial services

As much as possible, ad hoc frameworks for microfinance activitiesshould be avoided This would help prevent distortions of competitionbetween providers, the creation of unnecessary burdens (particularly tosmall microfinance institutions), and the development of unjustifieddifferences in the level of protection of customers’ interests

It is widely accepted that microfinance has distinctive features compared

to conventional banking For example, microcredit is not commercial orconsumer credit, collecting and administrating small amounts of savings

is not the same as dealing with large deposits, etc Therefore, existing sets

of regulation currently applicable to microfinance activities, includingbanking regulation, should be re-examined in order to expand theavailability of microfinance services

Ultimately, the goal is to increase the number of vulnerable clients servedand the volume of financial services delivered In general, in order toaccomplish this, microfinance frameworks should:

n be tailored to national circumstances

n gear regulations towards activities rather than institutions

n encourage a diversity of players in a market-driven environment

n make regulation proportionate to the expected benefits

n remove restrictions to microfinance activities and associated prudentialrequirements

n encourage linkages between banks, microfinance institutions and other

2.1 Tailoring frameworks to national circumstances

Defining a common global “ideal framework” for microfinance is impossible.The context in developing countries differs fundamentally to that in thedeveloped world Microfinance in very advanced economies is mainly aboutenabling people to access the banking sector More specifically, it is aboutfacilitating access to credit for the self-employed, small businesses andeven business start-ups in an environment where the support structures– public and private – are in place and functioning In the developing world,microfinance is primarily a response to a supply-side gap resulting fromthe inability of “conventional” banks to address the demand for financialservices from society Consequently, the number of unbanked is dramaticallyhigh in some countries and large geographical areas are not served.Financial intermediation structures do exist but with very limited capacity

An enabling framework should therefore be country or region specific but

it should take into account the profile of the target groups, the currentfinancial infrastructure, and the economic and social context Aspects linked

to the national history, political, legal and cultural background also need

to be part of the assessment There is no “one size fits all” approach

When seeking to define principles on a broad geographic scale and draw

on lessons learnt at regional level, a careful approach must be taken.Microfinance practices which have proven successful in the developedworld might not always be appropriate in a developing economy context.The same applies to trying to copy “tested” approaches amongdeveloping countries

2.2 Gearing regulations towards activities rather than institutions

Across the world, different categories of institutions are active in themicrofinance field: savings banks, NGOs, financial cooperatives, postalbanks, credit unions, etc Those institutions, known as microfinanceinstitutions (MFIs), vary in their legal status, mission, ownership structure,methodology, etc However, all of them share the common characteristic

of providing financial services to vulnerable and low income clients with

no access to the conventional banking sector

In order to place all MFIs and all their consumers on an equal footing,

it is crucial that regulations focus on microfinance activities, regardless of

the type of institutions that carry them out Whether a savings bank,

a postal bank, or an NGO is involved in a certain microfinance activity,the activity should be regulated the same Thus, all microfinance actors candevelop their activities on a level playing field, according to the principle

benefit from the same level of protection, regardless of which institution

2.4 Making regulation proportionate to the expected benefits

Regulation should be proportionate to the benefits that are expected to result,particularly with regards to the costs imposed to microfinance providers

Legislative and regulatory projects should be submitted to rigorous cost/benefit evaluations and in-depth impact assessments This is particularlythe case when considering prudential regulations which require a highlevel of supervisory capacity – often lacking in developing countries.Furthermore, regulations can have a considerable impact on administrativeprocesses and product design of the microfinance institutions

This should be considered These considerations would prevent the risk

of over-regulation, which can impair innovation and improvement ofmicrofinance products and services

Additionally, quality legislative proposals should call for openconsultations with all stakeholders involved, with the full commitment ofregulators and policy makers

2.5 Removing restrictions to microfinance activities and associated prudential requirements

It is important to provide a complete range of financial services to satisfythe financial needs of vulnerable people This enables them to carry outpersonal, family and professional projects In order to provide this range

of services, some of the existing restrictions must be removed on theproducts and services that can be proposed by the microfinance institutions

2.6 Allowing for increased deposit-taking activities

In particular, one way to extend the scope of pro-poor institutions would

be to allow institutions already engaged in lending activities, to undergodeposit-taking activities This would reduce their vulnerability tofluctuations of financial markets and protect these institutions from therisks of currency depreciation

However, a fundamental pre-requisite to any deposit taking activitieswould be a legal framework that guarantees prudential measures toprotect public deposits that are taken This is a fundamental pillar of astrong and secure formal financial sector Gaining the trust of small scalesavers for the development of a long term relationship requiresunconditional assurances of security of the system in which they mobilisetheir assets Prudential schemes currently covering savings institutionsshould be extended, with the right balance between mitigating risksand the implementation costs to all institutions which collect savings.The appropriate capacities for supervision to be efficiently carried outshould also be available

2.7 Allowing the recycling of deposits into lending

Equally, and in parallel with the optimisation of the accumulation of smallsavings, it is important to look at the way in which these savings can bebest mobilised to finance productive activities This mobilisation shouldfoster microeconomic development, support national sustainable economicgrowth and reduce national dependency on foreign investments andfluctuation in capital markets

In many cases, there are few – or no – incentives for savings banks toeffectively recycle deposits into lending Especially in Africa, a number of(postal) savings banks have been set-up as only deposit-taking institutionsand operate outside the scope of general banking regulations.Although this business model performed relatively well in the past, it hasreached its limits with many of these institutions collecting savings toinvest in low-risk but also low-return government bonds By not allowingthem to operate in the lending arena, they become passive savingscollectors, without any incentives to produce financial returns for theinstitution nor adapted services for their clients The lessons from variousexperiences demonstrate that removing the regulatory obstacles andallowing these institutions to expand their mission and diversify intolending and other banking functions would provide an incentive tobecome more market responsive The removal of regulatory obstacles toundertake lending activities, however, should be accompanied by skilledmanagement in those institutions in order to build sustainable lendingpractices from the start

2.8 Revising regulations for payment systems

Beyond the permission to lend that is sought by many postal savingsbanks – mainly in Africa – governments and regulators should alsoconsider revising national regulations to open national payment systems

to savings banks, postal savings banks and similar financial institutions.Due to the profile of their clients and to their often large client-base, it isrealistic to assume that savings banks could play a significant role in thesmall value payments market, including remittances and card services.Allowing savings and postal savings banks to participate in nationalclearing and settlement systems is undoubtedly an essential step towardsachieving inclusive financial sectors

For these reasons, savings banks consider it important to create a levelplaying field for all types of institutions that serve the same markets andhave the same risks In this respect, adequate supervisory structures andcapacities must be in place For coherence and efficiency, it should beenvisaged to enlarge the scope of existing banking supervisory institutions

or set up a specialised unit within the banking supervisory bodies

2.9 Encouraging linkages between banks, microfinance institutions and other retail outlets

Regulatory efforts are also needed to encourage partnerships betweenbanks and microfinance institutions Closer linkages would be mutuallybeneficial MFIs rely on banks for a variety of services, including depositfacilities, liquidity management services, and in some cases, emergencycredit lines to cover cash shortfalls For banks, the benefits would bethe opportunity to expand their client base through MFIs, and theiroperations through the network of MFIs (including in the rural sector)

The linkages between MFIs and banks would also help to broadly tietogether the activities in the formal and informal sectors of the economyand provide opportunities for small entrepreneurs to graduate frommicrocredit to conventional bank loans The opportunity to support suchpartnerships through regulation should be explored There may be strongpossibilities of improvement of services through banks acquiring a stake

in microfinance institutions or the sub-contracting of retail operations(deposit-taking services, money transfer services, last mile solutions forremittances)

In addition to these partnerships, regulation should also take into accountthe recent development of commercial alliances between financialinstitutions and other retail outlets These alliances are seen as a verysuccessful and non-expensive way of multiplying access points for clients.22

However, this phenomenon, which is called “branchless banking”, posesseveral regulatory challenges: third party liability, compliance with Anti-money Laundering and Combating Financing of Terrorism rules (AML/CFT)and consumer protection, just to mention a few

22 One of the most known examples of these types of alliances is the experience in Brazil where banks have made supermarkets, lottery stands and pharmacies their “agents”, allowing them to collect payments, process payments and open accounts

A non-conventional infrastructure to access financial services is rapidlydeveloping with these innovative branchless banking experiences.The role of regulation should be to ensure this infrastructure is safe andopen to all costumers, while at the same time providing an enablingenvironment for these solutions to expand This should be particularlyemphasised where banking intermediation is done through channelsusing advanced technology supports.

2.10 Implementing business rules to ensure consumer protection

Microfinance consumer protection measures should primarily target theprohibition of deceptive and unfair practices in lending and collectionpractices, which would seek to abuse the vulnerability of beneficiaries ofthe services

Regulation should ensure, as a minimum, the disclosure of full costs, feesand terms of the products and services, and supply clients with accurate,comparable and transparent information about the cost of loans and theremuneration of savings Public support would specifically be required toensure that education is provided in this area to improve understandingand basic knowledge to enable consumers to fully assess the extent ofthe engagements which are being taken

There is a public perception problem encountered with the disclosure ofinterest rates applied by microcredit institutions which can seem very high.Therefore, full, accessible, comparable and understandable informationshould be provided As for the level of the rate, any measures aimed atreducing the costs for the providers in order to expand outreach and giveopportunities to new market entrants should be encouraged It is truethat microcredit practices in some developing countries have benefitedgreatly from a relaxation of interest rate caps However, other creditcultures, particularly in Europe, may call for a different approach

Evaluation of the borrower’s repayment capacities is critical to preventingover-indebtedness – especially with low-income populations The opportunityfor national regulators and/or stakeholders (depending on the nationalcircumstances) to develop borrower databases to facilitate the definition

of the microborrowers’ profiles and the evaluation of their risks should

be assessed.23It is important in this context to mention that as regardsscoring and exchange of data, the quantitative approach should not beseen as the only way to assess reimbursement Microlending has proven

to be based on confidence and on a holistic approach towards thesituation of the borrower, rather than statistics It would also beimportant to assess the technical aspects of such databases, particularly

if interaction between different databases is envisaged

Finally, microfinance regulatory frameworks should preserve the socialobjective of microfinance transactions: to improve living standards bysupporting income generating activities and not be turned intoconsumer credit

23 While credit information services can provide clear benefits, they should be organized in the most transparent way in order to prevent its abusive use by those who have access to it.

SECTION 2.

WSBI MEMBERS’ EXPERIENCES:

A PRESENTATION OF REGIONAL

LEADERS

In the subsequent pages selected microfinance experiences from theWSBI members will be explored in reports organized by region.* The firstreport presents the magnitude and outreach of the members’microfinance activity in the Asia/Pacific region The second reportdiscusses the efforts of African members The third report concentrates

on the Latin American members’ leadership in microfinance

Each report is structured to be read separately An analysis of the regionalmarket structure and the different proximity models adopted by members

in order to promote access to financial services will be explained Each reportpresents the commitment and challenges of WSBI members in providingmicrofinance services in their respective markets as well as their results andachievements In examining the case studies, new trends and particularinnovations can be exposed in the field of information and communicationtechnologies, and in stimulating economic growth for the poor

* This section of the report is mainly based on the results of a questionnaire sent to WSBI members and desk research based on the annual reports of members

WSBI Latin American members:

nare large and long-establishedproviders of microfinanceservices As proximity financialinstitutions with large networks andwith a strong social commitment,they are leaders in the LatinAmerican microfinance industry

A rough estimate indicates thatthey provided microcredits tomore than 1.45 million clients in

2006 They also mobilized at leastUSD 779 million deposits fromtheir microfinance clients in thatsame year

n provide a full range of microfinance products All of them

mobilize savings, which is one of their major advantages compared toother microfinance providers focusing exclusively on credit They alsoprovide remittance services and some of them are leaders in thedistribution of accessible insurance products

n are experiencing impressive growth both in terms of clients,portfolio and savings collection On average they have experienced

40% portfolio growth rate and 30% client growth rate for each of thepast 3 years (2004-2006)

1.1 The context: Microfinance in Latin America

In Latin America, microfinance has experienced enormous success with avibrant sector of sophisticated and commercially oriented microfinanceproviders Indeed, most microfinance institutions in Latin Americaseek to become commercial players in the financial sector, achievingimpressive records of financial and operational performance Many ofthem are integrated into the formal financial system, being banks ormicrofinance specialized institutions, regulated by the financialauthorities in their countries

A recent regional survey1showed that in 2005, around 6 million peoplereceived microcredits in Latin America and most of those credits (81%)came from regulated institutions The overall portfolio stood at aroundUSD 5.4 billion for the same year In terms of growth, the survey revealedannual growth rates of 35% in terms of the number of clients and 46%

in terms of the size of the portfolio This confirms that the Latin Americanmicrofinance industry is experiencing rapid expansion

While microfinance in Asia and Africa has a stronger social focus on thepoor, microfinance in Latin America is mostly understood as a financialsolution for microentrepreneurs and their families Thus, loan averagevalues are higher than those found in the other regions (USD 783 in LatinAmerica versus USD 121 for Asia and USD 187 for Africa)2 It is alsomainly an urban activity, where individual credit methodologiespredominate over group lending This differs from the large rural schemesexisting in Asia

Microfinance providers in Latin America can be broadly characterized inthree categories They are;

n NGOs that have transformed into regulated institutions (upscaling),

n banks that have entered into the microfinance market (downscaling),

or

n traditional proximity financial institutions created to serve themicroentrepreneur market

1 Navajas and Tejerina 2006.

2 Data from MIX (2007a) – looking at median values of “Average Loan Balance per Borrower” for Latin America, Asia and Africa for the year 2005.

WSBI members which act as microfinance providers in the region belong

to the latter two categories They are either banks with specialmicrofinance programs or proximity financial institutions dedicated tomicroentrepreneurs In Spanish, the word “caja” is the equivalent of

“savings bank” while in Portuguese, the word is “caixa”

1.2 Microfinance as carried out by WSBI Latin American members

1.2.1 Magnitude and presence

WSBI Latin American members3are large and long-established providers

of microfinance services As proximity financial institutions with largenetworks and with a strong social commitment, many of them have beenpioneers in the Latin American microfinance industry As of today, 7 out

of 15 Latin American members are active in microfinance These membersare involved in different ways in the microfinance sector as can be seen

in Table 1

n Caixa Economica Federal (Brazil), BancoEstado (Chile) and BancoBCSC (Colombia), were initially created as savings banks and havetransformed into universal banks which among a full portfolio offinancial services, offer specialized microfinance services4 (includingcredit, savings, insurance and payment services)

n FEPCMAC (Federación Peruana de Cajas Municipales de Ahorro yCrédito – in Peru), FEDECREDITO (El Salvador) are federations thatrepresent the largest microfinance institutions in their countries, such asthe Cajas Municipales and the Cajas de Ahorro y Crédito respectively

n BANSEFI is the Apex Institution of the Mexican Cajas de Ahorro yCrédito Popular but has an additional role as a national savings bankmobilizing small savings with a large network

n BANRURAL (Guatemala) is a universal bank but has a very specificfocus on microfinance reaching out to rural and remote areas

3 A list of WSBI Latin American Members can be found in Annex I.

4 WSBI Members in Brazil and Colombia both created microfinance divisions inside their institutions In Colombia, Banco BCSC who traditionally serves the microfinance market, created in 2004 a further specialized microfinance programme called Creemos In Chile, BancoEstado created a subsidiary called BancoEstado Microempresas For further information

on Banco BCSC Creemos Program and BancoEstado Microempresas please refer to the

Table 1: WSBI member involvement in microfinance

Two WSBI members are among the precursors of the Latin Americanmicrofinance industry

n Colombian Banco BCSC (formerly known as Banco Caja Social), wascreated back in 1911 as a savings bank with the mission to cater tothe financial needs of low-middle income clients and microenterprises

n The Cajas de Crédito, today represented by FEDECREDITO in ElSalvador, started operating in rural and remote areas as early as the1940’s In the 1950’s they began offering microcredits (mainly tofinance microentrepreneurs’ working capital needs) through groupguarantees They also offered financial incentives to their staff based

on loan recovery.5

Currently, WSBI members in Latin America are among the biggestmicrofinance providers in the region They have an extensive reach with

a considerable number of branches and staff dedicated to microfinance

as is illustrated in Table 2 In the Mix Market, WSBI members are amongthe 15 biggest microfinance institutions in Latin America in terms of grossmicroloan portfolio and also in terms of number of microborrowers.6

5 Berger, Goldmark and Miller 2006: 10.

6 MIX 2008b The Mix Market provides information on over 800 individual microfinance institutions worldwide It represents the most comprehensive data source for the microfinance industry Available at: http://www.mixmarket.org.

Type of involvement in

Brazil Caixa Economica Federal Banks with a microfinance

Colombia Banco BCSC

El Salvador Federación de Cajas de Crédito Federations that represent

y Bancos de los Trabajadores – microfinance specialized institutionsFEDECREDITO

Peru Federación Peruana de Cajas

Municipales de Ahorro y Crédito –

FEPCMAC

Mexico Banco del Ahorro Nacional y Apex institution and savings bank

Servicios Financieros – BANSEFI

Guatemala Banco de Desarrollo Rural S.A – Microfinance specialized bank

BANRURAL